UPDATE 2-US upholds ethanol mandate, says doesn't harm economy

Fri Nov 16, 2012 1:37pm EST

* EPA turns down requests to waive mandate for second time

* Move to benefit ethanol producers

* Oil industry complains hard to comply with mandate

By Patrick Rucker and Timothy Gardner

WASHINGTON, Nov 16 (Reuters) - The United States on Friday upheld its program to turn a large share of the corn crop into ethanol for motor fuel, saying it did not cause undue economic harm despite steep competition for depleted U.S. grain supplies after the worst drought in 50 years.

In August, as the drought seared the Midwest, the governors of several livestock producing states including Georgia and New Mexico asked the Environmental Protection Agency to suspend the ethanol mandate. They said it pushed up prices for feed grain and squeezed producers' profits.

But the EPA decided that the relief brought on by freezing the mandate would not be significant and would reduce corn prices only about 1 percent.

"We recognize that this year's drought has created hardship in some sectors of the economy, particularly for livestock producers," said Gina McCarthy, assistant administrator for the EPA's Office of Air and Radiation.

"But our extensive analysis makes clear that ... waiving the (Renewable Fuel Standard) will have little, if any, impact."

The EPA determined the mandate did not cause severe economic harm, a requirement for waiving the measure.

Aimed at reducing U.S. reliance on foreign oil, the RFS requires 13.2 billion gallons of ethanol to be made from corn this year. About 40 percent of the U.S. corn crop is used to make ethanol.

Many oil companies oppose the RFS, saying it adds costs to making gasoline.

Patrick Kelly, a senior policy adviser at industry group the American Petroleum Institute, said the EPA "applied an improper and unnecessary high bar, which makes it questionable if any waiver could ever be granted," and that the RFS had become "increasingly unrealistic and unworkable."

This was the second time that the EPA denied a waiver. In 2008, regulators rejected a Texas petition to halve the mandate temporarily.

Upholding the mandate could benefit ethanol producers like Archer Daniels Midland and privately held POET.

Corn futures in Chicago were up 3-1/2 cents at $7.24-3/4 a bushel on Friday, reversing early losses after news the government would uphold the mandate, traders said.